Dow Drops 733; Another Reason to Like Gold

The credit collapse is not entirely over. Nor is its impact on Main Street.

And as we saw yesterday, there will be more sell-offs, sharp ones that scare the dickens out of nearly everyone.

That’s why I suggest sticking mainly with natural resource-based companies that operate businesses which deal in assets that have intrinsic value — and that will be the main recipients of the next wave of what I call the “Great Re-inflation.”

At the top of that list is my all-time favorite: Gold.

You know I’m a gold bug. And given everything that’s happening in the world today, I’m more of a gold bug than ever before.

How can you NOT be in gold?

There are dozens of reasons I believe everyone must own some gold. But lately, there’s another one that’s rising to the surface …

China Is Soon Going to Make Some Big Buys In the Gold Market

Just yesterday, China’s central bank announced that its foreign-exchange reserves rose to a record $1.905 trillion.

If China were to lay this nearly $2 trillion in surplus reserves end-to-end using dollar bills, the trail would stretch for 193,813,130 miles. That’s enough to wrap around the widest part of the earth 7,752 times!

Clearly, Beijing’s piggy bank is overflowing with money. In fact, at nearly $2 trillion, China has the largest foreign reserves of any country in the history of the planet.

Compare it to Washington, which now has nearly $11.4 trillion in debts, not counting the contingent liabilities of the real estate crisis, Social Security or Medicare.

Whose paper currency do you think should have more purchasing power? Naturally, the yuan. Yet that’s not the case — the dollar remains stronger.

But not for long.

I warned of this a couple of years ago, but now the signs are even clearer: Over the next few years China is essentially going to corner the world’s gold market.

It’s one of the chief reasons I am now even more bullish on gold, expecting the price of the precious yellow metal to eventually exceed $2,000 an ounce.

Mind you, Beijing won’t intentionally set out to corner the gold market. But, in effect, that will be the end result.

Take it from me. I’ve met with central bankers, regulators, and gold traders in China and Asia. I know Beijing’s views on the yuan and gold.

You see, Beijing knows that the dollar’s status as a reserve currency is soon going to be history. Just like the pound sterling lost its status as the world’s reserve currency in the early 20th century.

And authorities in Beijing also believe that as China rapidly progresses toward superpower economic status, the yuan should be a world-class, stable medium of exchange.

They envision the yuan as a major international currency some day, with as much (or more) status than the U.S. dollar. That’s why they’re going to back the yuan with gold … loads of it.

Plus, there’s another reason for Beijing to buy more gold as part of China’s piggy bank. China has an estimated $1.3 trillion invested in dollar-denominated investments. They can’t get out of the dollar quickly. It would destroy the U.S. economy which would have a direct negative impact on China.

So the smart thing to do: Hedge and diversify existing dollar holdings with gold.

Consider this: Right now, China has a mere 0.9% of its reserves in gold (600 tons). That’s the lowest of any industrialized economy! To put it into perspective …

The U.S. has 77.3% of its foreign reserves in gold.

The European Union has 23% of its reserves in gold.

Lithuania, Mozambique, and even tiny Nepal all have more of their reserves in gold than China.

Just to up its reserves to 5% in gold, Beijing would have to purchase $93 billion worth of bullion. That could easily send the yellow metal skyrocketing to more than $2,000 an ounce.

And if China were to match roughly half of the gold reserves held by the United States, it would have to buy another $636 billion worth. That kind of buying would send gold to well more than $2,000 an ounce. Probably to $3,000, or even higher.

My view: China has already started purchasing small amounts of gold. It’s one of the reasons gold is now holding support at its 1980 high in the mid-$800 level, well above important support levels on the charts from $600 up to $735 an ounce.

This is yet another reason I recommended you substantially increase your gold holdings back in mid-September.

I believe gold is still one of the best bets out there, loaded with huge profit opportunities. No matter what aspect of the market I examine, I see much, much higher prices to come for the precious yellow metal.

Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Tony Sagami, Nilus Mattive, Sean Brodrick, Larry Edelson, Michael Larson and Jack Crooks. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Kristen Adams, Andrea Baumwald, John Burke, Amber Dakar, Dinesh Kalera, Red Morgan, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau and Leslie Underwood.

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